Corporate restructuring is one of the most complex and fundamental phenomena that management confronts. Each company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core business. From this perspective, corporate restructuring is reduction in diversification.
Corporate restructuring is an episodic exercise, not related to investments in new plant and machinery which involve a significant change in one or more of the following
- Pattern of ownership and control
- Composition of liability
- Asset mix of the firm.
It is a comprehensive process by which a company can consolidate its business operations and strengthen its position for achieving the desired objectives:
It involves significant re-orientation, re-organization or realignment of assets and liabilities of the organization through conscious management action to improve future cash flow stream and to make more profitable and efficient.
Meaning and Need for Corporate Restructuring
Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company.
Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share.
Corporate restructuring may also take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place
In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually a hope, what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.
Purpose of Corporate Restructuring
- To enhance the share holder value, The company should continuously evaluate its:
- Portfolio of businesses,
- Capital mix,
- Ownership &
- Asset arrangements to find opportunities to increase the share holder’s value.
- To focus on asset utilization and profitable investment opportunities.
- To reorganize or divest less profitable or loss making businesses/products.
- The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of capital.
Characteristics of Corporate Restructuring
- To improve the company’s Balance sheet, (by selling unprofitable division from its core business).
- To accomplish staff reduction ( by selling/closing of unprofitable portion).
- Changes in corporate management.
- Sale of underutilized assets, such as patents/brands.
- Outsourcing of operations such as payroll and technical support to a more efficient 3rd party.
- Moving of operations such as manufacturing to lower-cost locations.
- Reorganization of functions such as sales, marketing, & distribution.
- Renegotiation of labor contracts to reduce overhead.
- Refinancing of corporate debt to reduce interest payments.
- A major public relations campaign to reposition the company with consumers.
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